DIGITAL TRANSACTION TAX
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BEPS
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Action 1: Addressing the tax challenges of the digital economy
Modify the existing Permanent Establishment (PE) rules to recognize significant digital presence in other countries.
Definition of virtual fixed place of business PE based on a company's online activities through its website hosted out of another jurisdiction.
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Taxation Provisions
Imposition of final withholding tax on payments for digital goods/services from foreign e-commerce providers.
Equalisation levy on transactions involving non-residents conducting digital business in India.
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Equalization Levy 1: Finance Act 2016 (Section 165)
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Indian Taxation Amendments
Introduction of Chapter VIII titled "Equalisation Levy" in the Finance Act, 2016.
6% levy on services received by a non-resident without a PE in India, from a resident or non-resident with a PE in India.
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Basis of Charge
Applicable when non-residents provide:
Online advertisement
Digital advertising space or services
Charge: 6% on consideration.
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Exclusions from Equalisation Levy:
Non-resident service provider with a PE in India for specified services.
Business-to-Consumer (B2C) transactions.
Small players with transactions below INR 1,00,000.
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Collection and Recovery:
The payer must deduct and deposit the Equalisation Levy.
Service provider is not held liable for the payment.
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Finance Act, 2018: Introduction of Significant Economic Presence (SEP).
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Definition of Significant Economic Presence (SEP):
Transactions of goods/services by non-residents in India with aggregate payments exceeding a specified amount.
Systematic solicitation of business through digital means in India.
“Activities constitute SEP regardless of where agreements are made or business presence.”
SEP implementation was deferred to April 2021.
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Equalization Levy 2: 2020 (Sec. 165 A)
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Overview of Equalization Levy 2020:
Basic charge: 2% on consideration for services provided by non-resident e-commerce operators.
Charged on e-commerce supply/services.
Collection: To be paid quarterly by e-commerce operators.
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Basic Charge Summary:
2% Equalisation Levy on non-resident e-commerce operators.
Applicable on e-commerce supply or services.
Payments due quarterly; recovery possible from the payer in case of default.
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Details on Equalization Levy:
2% on consideration for e-commerce services targeting Indian residents or IP addresses.
Includes sales of advertisements or data from India.
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Definition of E-commerce Operator:
A non-resident managing an online platform for sales or services.
"Online" refers to services accessed via the internet or digital means.
"E-commerce supply/services" covers a range of online transactions and activities.
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Exclusions from E-commerce Levy:
If e-commerce operator has a PE in India, effective connection exempts it from levy.
For operators with gross receipts below INR 2 Cr.
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Case Study I: B2C Transaction:
X Co. sells laptops online to Indian customers, with invoicing and payment conducted online.
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Case Study II: B2B Transaction:
F Co. sells laptops to I Co. in India, online contract negotiation and payment.
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Case Study III: B2B Offline Contract:
X Co. and Y Co. agree offline for laptop sales, invoicing done online.
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Case Study: Provisions of Services I:
U Co. provides IT services online to I Co. under an offline contract.
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Case Study: Provisions of Services II:
U Co. manages hotel bookings online with service delivery offline.
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Facilitator (Marketplace Model) Case Study I:
X Co. sells UK Co.'s laptops, raising questions about EL liability and payment responsibility.
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Facilitator (Marketplace Model) Case Study II:
X Co. lists UK Co. hotels. Questions arise about EL applicability and payment calculations.
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EL, Royalty & FTS Interplay:
Explores conditions under which EL vs. income tax applies.
Exemption implications for FY 2020-21 and beyond.
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Compatibility with International Law:
Reconciling Indian law with international agreements, focusing on Article 245.
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Most Favoured Nation (MFN) Treatment:
Examination of if Chapter VIII treats countries equitably under trade agreements.
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National Treatment Issues:
Assessing if Equalisation Levy disproportionately affects non-resident suppliers.
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Discriminatory Definition Issues:
Implications of defining e-commerce operators in a way that affects non-residents adversely.
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Arbitrariness in Procedures:
Discusses the lack of a proper assessment mechanism under Chapter VIII.
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Challenges for E-commerce Operators:
Non-residents face burdens in determining resident status of purchasers under Indian law.
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Order Imposition Challenges:
Examines the implications of the absence of a distinct order for imposing the Equalisation Levy.
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Legal Considerations for Declarations:
Issues arising when customer declarations regarding residency are incorrect.
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Impact of Incomplete Revenue Law:
Argument that absence of proper mechanisms could violate constitutional provisions.
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Extra-Territoriality Concerns:
Investigates the legitimacy of imposing levies on purely foreign transactions.
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Example 1:
Resident Indian buying pizza online in the UK raises issues about the applicability of the Equalisation Levy.
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Example 2:
Indian customer searching for products in a UK search engine highlights potential Equalisation Levy implications.
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OECD PILLAR -1:
Reference to global tax initiatives addressing digital economy challenges.